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Free «History of Clive Peeters Limited» Essay Sample

1. Brief Review of History Clive Peeters Limited (To Collapse from Inception).

History of Clive Peeters Limited:

CPR (Clive Peeters Limited) was established in 1993. Clive Peeters Limited started it business as retailer in electrical appliances and operated across whole Australia. Company captured a large market share through exceptional customer services and wide range of electric appliances to its customers with high brand recognition. Company operates with dual brand names in different markets i.e. with the name of Clive Peeters and Rick Hart. Clive Peeters Limited is offering wide range of products and services (range over 20,000 individual models) to its customers including electric appliances (laundry and cooking appliances, cooling and heating solution, small electric products and computers, and home entertainment equipments (Clive Peters Limited, Annual Reports, 2009).

Due to various reasons (discussed below), Clive Peeters Limited faced crises and was purchased by one of the leading company in electronics sector, Harvey Norman Holdings Limited in May 2005. $ 20 millions fraud by employee followed by huge fall in sales compels the management to take this drastic action.

2. What type of company was Clive Peeters Limited prior to its collapse? Comment on the differences between this type of company and other types of companies such as CPA Australia, SingTel Optus Pty Limited, Kimberley Diamond Company NL.

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Type of Clive Peeters Limited Prior to its Collapse:

Clive Peeters Limited can be classified as a For-Profit organization by objective. Under the umbrella of Size of membership or ownership Category, Clive Peeters Limited relays among Public Companies. By Mode of Participation, Clive Peeters Limited is among the share companies and Liability is limited and is limited by shares, if it is viewed under the parameters of Extent of Liability. As for as the Status in Stock Exchange is concerned, Clive Peeters Limited was listed during year 2005, with Australia Stock Exchange. Before year 2005, firm's status was Not-Listed. And by Sector, company is in Public Sector (Clive Peters Limited, Annual Reports, 2009, 2008).    

Contrast with CPA:

CPA Australia is Limited company and it is limited by Guarantee and is For-Profit organization by objective.  By membership or ownership Category, it is a public company and falls in public sector.

3. Clive Peeters Limited's debt and equity financing Assessment (Short Term and Long Term Solvency measures).

Analysis of firm's solvency ratios for long term and short term debt payment ability helps to state here that firm's ability to pay its debt decreases over period of analysis from financial year 2006 to financial year 2009. Current Ratio figures as shown below are increasing over the period analyzed mainly due to the increase in current assets, effected by increased in inventory account of Clive Peeters Limited. One of the man reasons observed in increased in inventory balances is decline in sales and resulted in relative decline in cash balances. Current ratio figures are showing firm's command over its operations but still financial health of the company can not be stated only by using the firm's current ratio figures. One reason behind this fact is that most of the firm's current assets are relatively less liquid like inventory and receivables. Since inventory balances are so high, more conservative view of short term assets debt payment ability is to be assessed i.e. Quick Ratio. Quick Ratio or Acid Test Ratio figures below showed firm's inability to fulfill its short term obligations if they come due as there were even below 50.00% amount in firm's current assets to meet its obligations when they came due. These figures are too low as because firm's current liabilities mainly based on short term borrowings and trade payables which infect came due frequently and it would be difficult for firm to manage in this situation with low cash balances and less liquidity rate of inventory (Inventory Turnover and operating cycle). Moreover, low receivable turnover rate of firm made it more difficult because firm's current assets had high receivable balances as well. And this was the reason that after $ 20 millions fraud by employee and decline in sales in April 2010, firm's management was compelled to take drastic decisions regarding sale of it stores. Firm's debt ratios figures as shown below throw light on various reasons behind the collapse of Clive Peeters Limited. High debt of the firm made it unable to meet cash requirements through debt. Debt ratio figures had increased continuously over the period of time analyzed. Which infect effected firm's long tem solvency badly and was among the major causes of its disaster. High debt ratio figures of the company shows that major source of funds the firm is using is debt which would cause high financial charges in results and high cost of capital and in turn increase the firms required rate of return. This would relatively decline the firm's profitability and Residual incomes. Time Interest Earned Ratio figures of the firm is showing firm's inability to even cover its financial cost and charges mainly due to decline in sales and ultimately in profitability, and due to high debts. Due to high debt ratio of the company, company had to paid high financial charges and that's the reason behind the low Time Interest Earned Ratio figures of the company.

Advantages and Disadvantages of Debt and Equity Financing (Lawrence J. Gitman, (2004), Principles of Managerial Finance, Pearson publisher):

1. Advantages of Debt Financing:

a. Since the lender of money does not have the claim on business equity, it does not dilute the ownership interest.

b. Lender of the money does not have any claims over profits of the company in future and is entitled only for the pre-agreed interest and principle payments.

c. The interest and principle payments are known so can be forecasted and can be planned for.

d. Interest payments over loans and debt can be deducted in firm's tax returns which in turns lower the actual cost of debt.

e. Debt raising of capital is relatively easy and less complicated.

f. Debt capital raising save the firm to mail periodically to large number of investors.

2. Disadvantages of Debt over Equity Financing (Lawrence J. Gitman, (2004), Principles of Managerial Finance, Pearson publisher):

a. Unlike the equity capital, the debt capital is at some point.

b. Interest and financial charges are the fixed cost of the company and raise its total and financial break evens and infect enhance the firm's leverage which would put the firm in danger in era of declining in sales.

c. The repayments of interest and principles at specific time create the need to plan and budget for it as well.

d. It often compels the company to restrict its activities and operations and preventing the company to avail alternative financing options and perform non core business activities.

e. Company with high debt ratios is considered as more risky by the lenders and investors. And hence the business is compelled to be limited the amount of debt it could carry.

f. Company has to collateral its assets against the debt financing which is not in case of equity financing.

 

2006

2007

2008

2009

CR

1.317

1.22

1.398781

1.428431

QR

0.49

0.36

0.446646

0.456559

DR

55%

60%

69%

69%

TIER

48.36

14.79

5.880

loss

4. Causes which contributes to the collapse of Clive Peeters Limited.

Beside above stated cause's i.e. low solvency of the company there are many other reasons and causes found that contributed in collapse of Clive Peeters Limited (Angus Kidman, July02, 2010). One among them was the fraud by one of the employee of Clive Peeters Limited who had falsified the entries in account of payrolls and had transferred the cash out of business. She had transferred about $20 millions in to her 8 different personal bank accounts and purchased various real estates properties, motorcars, Jewelry and others during 2007 and 2009 (Brett Winterford, Aug 20, 2010). This fraud by company's employee is followed by the decline in sales, during previous month and contributes a lot in stated collapse.  As a result, Clive Peeters Limited's management decided to sale its 44 stores (Brett Winterford, Aug 20, 2010). A renowned electric appliances retailer "Harvey Norman Holdings Limited" purchased its retail stores, operating process and stocks for $55 millions (Angus Kidman, July02, 2010). However, there were number of other reasons and factors which also contributed to firm's collapse including less internal control and compliance of management over staff and operations.

5. What is the status quo of Clive Peeters? What are differences between voluntary administration, receivership and liquidation?

Liquidation:

Liquidation is a process with which a part of company or a company as a whole is come to at end and the assets of the company, its properties are redistributed. It sometime also refer to the winding up of the business by the company's management and owners. Liquidation is further of two types i.e. compulsory liquidation and voluntary liquidation. Voluntary Liquidation refers to the winding-up of business by will. Management of the company wind-up the affairs and dissolve it in order to fulfill the obligations. It occurs when the company is not in sound financial position to run its operations smoothly i.e. it losses its credit worthiness in eye of its stakeholder.

The basis and grounds on which some company can apply for compulsory liquidation vary from jurisdiction to jurisdiction. Following are the some normal and general grounds which make eligible to apply to the court for compulsory liquidation.

1. A company has resolved.

2. The firm was incorporated as the public limited company and still has not issued the trading certificates.

3. The company is old public limited company.

4. The firm dons commenced business activities with in prescribed time span of normally one year.

5. The members of the firm have fallen below from minimum number of members as prescribed in statute.

6. The firm is unable to pay its debts and obligations as the come due.

7. It is found that the winding up the operation of firm is just and equitable.

Voluntary Administration:

As for as the voluntary administration is concerned, it is basically as rescue mechanism for companies to rescue the insolvency and allow some other company to run its business is a whole or a part of business (Kahl, 2002). It is a formal moratorium arrangement as per Corporation Act. In it the insolvent company or a company near to insolvency allows other company to run its business.

The voluntary administration provides the companies the breathing space in time of financial distress from its creditors (Krohmer et al., 2007).

As per clause 5.3A in corporation act, the basic goal of voluntary administration is to provide the firm a room to avoid from liquidation process. Another purpose behind this type of administration is to provide the chance to the companies to and business to continue and run in future. And if the business can not be going concerned, in order to provide the better return to the firm's shareholder and creditors, firm is liquidated (Lakoniishok et al., 1991, Morey et al, 2006).
In case of voluntary administration, when the board of company appointed in writing the administrator, the process commences. The board of company goes for this if it is realized that the company is solvent or going to be solvent and an appointment of voluntary administration will be useful.

After the administrator is appointed the administrator then held a meeting with creditors with in five working days and the second meeting has to arrange within next 23 days (Gophers, 1996).

Receivership:

Receivership is the situation under which an enterprise or an institution is going to be held by an institution or enterprise which is placed in custodial responsibility for the property of other including tangible and intangible assets. Three types of receiver's appointments may exist.

1. The receiver appointed by the government.

2. Private receiver.

3. Receiver is appointed by the court.

Process of receivership:

Many regulatory bodies are provided with the power to place financial and banking institutions into the receiverships such as Office of Comptroller of currency for failing of the national chartered commercial bank in USA (Gophers, 1996).

6. What do you think will happen to Clive Peeters in the foreseeable future?

High debt financing leads the company toward high risks, as it was in the case of Clive Peeters Limited. High debt financing make it difficult for firm's management that to manage its cash follows and short term and long term obligations when they come due. To raise the funds through debt is necessary for company but there must be balance between both the sources of capital. High as well as low debts both put the firm in danger. As for as the Clive Peeters Limited is concerned, it has faced the crises because of poor cash fallow management and poor internal control of operations, employees and process (Angus Kidman, July02, 2010). Which in turn lead them to face the stated crises. Poor overlook on operations and lacking internal controls lead them to be fraud by the employees. Company infect has decline its good will and reliability. To overcome this problem, company must have to explore and exploit opportunities as competitive as well as technological threats are there for management.

   

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